Results Review, 26 February 2015 Bossini (592 HK) Buy (Maintained) Consumer Cyclical - Apparel Target Price: HKD1.01 Market Cap: USD158m Price: HKD0.75 Macro Risks 2 Discipline Pays Dividends Growth . 2 0 Value . 03 0 . 03 0 1HFY15 results (NP +17.9% YoY) are on track to meet our original full . Bossini (592 HK) 0 Price Close Relative to Hang Seng Index (RHS) year estimate. Reiterate BUY, keeping estimates and TP (34% upside) 0 0.90 118 unchanged. Despite Occupy Central affecting the key Hong Kong 0 0.85 113 market, both group revenue and same-store sales recorded 4% growth. We expect 2H NP to grow 15% YoY. We forecast an attractive FY15 0.80 108 dividend yield of 8.5%, assuming 70% ordinary dividend payout. 0.75 103 Results on track. 1HFY15 (Jun) net profit growth grew 17%, in line with 0.70 98 our full-year forecast. While 1HFY15 sales revenue slightly decelerated to 3.7% mainly due to slower sales in the Hong Kong market, stronger 0.65 93 mainland Chinese sales (thanks to three net openings of self-operated 0.60 88 stores, vs. our initial expectation of five net closures), 2HFY15 sales 0.55 83 contribution from the Macau flagship store, and stronger export sales into UAE and India should compensate to meet our original estimates 0.50 78 90 80 70 Regional breakeven on track. Mainland China, Taiwan and Singapore 60 regions are all trimming losses on the EBIT level, and management 50 40 conveys that all regions are profitable on the store-level. 30 20 10 Earnings unchanged; dividends raised. We raise sales and SG&A Volm forecasts slightly to reflect the above reasons, and adjust tax rate lower 14 14 14 14 14 14 - - - - - - Apr Oct Jun Feb to reflect earnings contribution primarily from the Hong Kong market. We Aug Dec also raise our projected FY15-17 dividend payout to 70% (from 50%). Source: Bloomberg The payout represents the ordinary dividends paid in FY14, which we think is sustainable given its disciplined expansion plans. For prudence Avg Turnover (HKD/USD) 1.14m/0.15m sake, we have not assumed a special dividend in 2HFY15 (2HFY14: 1.6 Cons. Upside (%) 60.0 HK cents) Upside (%) 34.4 52-wk Price low/high (HKD) 0.59 - 0.85 Reiterate BUY with unchanged TP of HKD1.01. Bossini is our key Free float (%) 33 BUY call in the HK consumer space. We arrive at the same target price of HKD1.01 by applying 10x forward P/E multiple, based on a 10% Share outstanding (m) 1,629 premium to sector peer’s FY15 P/E on the calendarized blend of FY15 Shareholders (%) and FY16 EPS of HKD0.10. We view that Bossini deserves to trade at a Tsin Man Kuen, Bess 67.2 premium to peers because of its superior dividend yield of 8.5%, above its HK-listed apparel sector’s c.7%. Given its discipline in store expansion, we believe its profitability and yield are likely to be maintained. Share Performance (%) Forecasts and Valuations Jun-13 Jun-14 Jun-15F Jun-16F Jun-17F YTD 1m 3m 6m 12m Total turnover (HKDm) 2,517 2,548 2,694 3,001 3,308 Absolute 19.0 15.4 5.6 8.7 4.2 Reported net profit (HKDm) 22 127 148 185 214 Relative 14.1 15.8 1.8 10.4 (6.7) Recurring net profit (HKDm) 22 127 148 185 214 Recurring net profit growth (%) 38.8 472.3 16.4 25.3 15.5 Shariah compliant Recurring EPS (HKD) 0.01 0.08 0.09 0.11 0.13 DPS (HKD) 0.03 0.07 0.06 0.08 0.09 Robin Yuen, CFA +852 2103 9202 Recurring P/E (x) 54.7 9.6 8.2 6.6 5.7 [email protected] P/B (x) 1.67 1.52 1.44 1.35 1.26 P/CF (x) 8.60 5.44 7.25 5.86 4.92 Dividend Yield (%) 3.8 9.4 8.5 10.7 12.3 EV/EBITDA (x) 6.99 3.32 3.50 2.71 2.25 Return on average equity (%) 3.1 16.6 17.9 21.2 22.9 Net debt to equity (%) net cash net cash net cash net cash net cash Our vs consensus EPS (adjusted) (%) (4.9) (0.5) 1.6 Source: Company data, RHB See important disclosures at the end of this report Powered by EFATM Platform 1 Bossini (592 HK) 26 February 2015 Resilient Outperformer Revenue growth & GP margin. Management notes that same-store sales growth primarily came from volume growth, rather than effective ASP increase. While we believe some of their new products may have led to a product mix upgrade, they explain that the prevalence of discounting from peers (e.g. Uniqlo, Giordano) has pressured Bossini to follow suit. We note that Bossini’s recent partnership with Disney and Snoopy to produce co- branded and licensed products would have helped with product differentiation and therefore mitigate the level of discounting. The increase in 1H15 GP margin of about 1% comes from a combination of: i) cheaper garment procurement prices (from cheaper cotton) and ii) selling more in- season merchandise in mainland China than discounted out-of season merchandise. Expansion strategy. Management explains future store growth will be slow and steady, aiming to open new stores after reviewing them on a case-by-case basis for individual store profitability. They stress the importance of avoiding opening stores just for market share and to meet analyst expectations (thus they didn’t give guidance on net store openings). We applaud their philosophy as we also believe discipline is instrumental for sustainable profitability for any retailer, and is especially relevant for a stable dividend stock like Bossini. Update on China. For their mainland China business, future self-operated stores will be opened in southern China as they have regional expertise there, while penetration into northern China will rely on franchise partners. Currently, Bossini boasts that over 90% of their China stores are profitable on the store-level; thus guiding EBIT breakeven in the China segment by FY16. Jan-Feb 2015 sales environment. When asked about reports on the reduction in mainland tourist arrivals in Hong Kong, management comments that YTD sales have met expectations. From our past conversations with management, we believe that number would likely mean +c.10% YoY growth, and if such as the case, and Apr-Jun sales figures are comparable, we are more than confident that Bossini can meet our FY15 estimates. Inventory turnover. We note 1HFY15 inventory levels slightly improved to 92 days from 1HFY14’s 99 days. Tweaking forecasts Sales revenue. We increase our FY15-17 forecasts slightly by 1/4/4% to incorporate: i) stronger China sales; ii) the two Macau flagships to come online in 4Q15; iii) faster export sales growth with distributors in six different countries to accelerate opening of Bossini shops, including India and the Middle East. SG&A. We increase SG&A as % of sales slightly to: i) reflect the initial ramp-up required for the flagship Macau store; ii) be less aggressive on our cost savings from economies of scale. Tax rate. We re-adjust the rate to 18% (from 25%) as: i) most of Bossini’s profit comes from Hong Kong and export markets; China, Taiwan, and Singapore are merely breakeven in terms of individual store profitability. Net profit for FY15-17, from the combined factors above, therefore remain unchanged (Figure 5). See important disclosures at the end of this report 2 Bossini (592 HK) 26 February 2015 Figure 1: Bossini’s semiannual P&L (HKDm) 1H13 2H13 1H14 2H14 1H15 2H15E Revenue 1,334 1,183 1,273 1,275 1,319 1,374 COGS (698) (620) (645) (602) (655) (651) Gross Profit 636 563 628 673 665 723 Other income 8.2 7.7 7.8 9.8 9.3 9.6 Other operating exp. (26) (24) (28) (32) (14) (49) SG&A (570) (553) (519) (591) (560) (608) Selling & distribution (440) (410) (389) (454) (429) (460) Admin expenses (130) (143) (130) (137) (131) (148) EBIT 49 (6) 88 61 100 76 Finance costs (net) 1 2 2 4 5 0 PBT 50 (4) 90 65 104 76 Taxation (16.3) (7.5) (15.8) (12.1) (16.9) (15.6) Net Profit 34.1 (11.9) 74.5 52.6 87.5 60.5 Net Profit (Recurring) 34.1 (11.9) 74.5 52.6 87.5 60.5 EPS-basic (HKD) $0.021 -$0.007 $0.046 $0.032 $0.054 $0.038 EPS-diluted (HKD) $0.021 -$0.007 $0.046 $0.032 $0.054 $0.038 % Change y/y Sales Revenue -7.8% -8.8% -4.6% 7.8% 3.7% 7.8% Gross Profit -11.0% -2.8% -1.3% 19.5% 5.9% 7.4% Operating Profit -38% -78% 80% -1063% 13% 25% SG&A -6.1% -7.8% -8.9% 6.8% 7.9% 2.8% Selling & Distribution -7.2% -12.8% -11.6% 10.7% 10.2% 1.3% Admin -2.1% 10.5% 0.3% -4.4% 1.1% 7.8% Net Profit (Recurring) -42% -72% 119% -542% 17.4% 15.1% As % of Sales GP Margin 47.7% 47.6% 49.3% 52.8% 50.4% 52.6% SG&A 42.7% 46.8% 40.8% 46.3% 42.4% 44.2% Selling & Distribution costs 33.0% 34.7% 30.6% 35.6% 32.5% 33.5% Admin costs 9.7% 12.1% 10.2% 10.7% 10.0% 10.7% EBIT Margin 3.7% -0.5% 6.9% 4.7% 7.6% 5.5% NP Margin 2.6% -1.0% 5.9% 4.1% 6.6% 4.4% Effective tax rate 32.4% -172% 17.4% 18.8% 16.2% 20.5% Dividend payout 79.9% -164% 50.0% 146% 50.3% 0% Seasonality (as % of full year) Sales 53.0% 47.0% 49.9% 50.1% 49.0% 51.0% EBIT 114.7% -14.7% 59.4% 40.6% 56.8% 43.2% NP 153.5% -53.5% 58.6% 41.4% 59.1% 40.9% Source: RHB See important disclosures at the end of this report 3 Bossini (592 HK) 26 February 2015 Figure 2: Bossini’s sales revenue breakdown Years to 30June (HKD m) 1H13 2H13 2013 1H14 2H14 2014 1H15 Total Revenue 1,334 1,183 2,517 1,273 1,275 2,548 1,319 Hong Kong & Macau 602 543 1,146 634 614 1,247 657 Export 240 240 480 255 255 510 264 Mainland China 223 166 389 154 194 348 175 Taiwan 134 113 246 109 104 212 104 Singapore 135 121 256 122 109 231 119 y/y% change Hong Kong & Macau 5% 5% 13% 9% 4% Export -4% 6% 6% 6% 3% Mainland China -32% -39% -35% -31% 17% -11% 14% Taiwan -15% -19% -17% -19% -8% -14% -4% Singapore -4% 6% 0% -10% -10% -10% -2% As %proportion Hong Kong & Macau 45% 46% 46% 50% 48% 49% 50% Export 18% 20% 19% 20% 20% 20% 20% Mainland China 17% 14% 15% 12% 15% 14% 13% Taiwan 10% 10% 10% 9% 8% 8% 8% Singapore 10% 10% 10% 10% 9% 9% 9% Source: RHB Figure 3: EBIT